Gratuity Rules 2026: Eligibility, Calculation & Tax Benefits
Gratuity moved from the Payment of Gratuity Act, 1972 into the Code on Social Security, 2020. The headline change is that fixed-term employees qualify after one year. The less-noticed change is that the 50% wage definition raises the "wages" base for everyone.
1. Eligibility
| Employee type | Minimum service |
|---|---|
| Permanent | 5 years of continuous service |
| Fixed-term and contract (direct) | 1 year, pro-rata (Section 53 of the Code) |
| Death or disablement | No minimum service |
2. The formula
Gratuity = (15 × last drawn wages × completed years of service) ÷ 26
- Wages means basic plus DA, with the 50% rule applying to the wage definition. The Central Rules did not carry forward the draft's detailed exclusions, so rely on the Code's definition and the Ministry's FAQs.
- Completed years: service in the final year exceeding six months is rounded up. So 7 years 8 months counts as 8.
- Fixed-term rounding (Rule 33): after at least one year, a further period of more than six months but less than one year is rounded up to one additional year.
3. Worked examples
Example A: permanent employee.
Last drawn basic + DA ₹50,000; service 8 years 7 months, rounded to 9 years.
15 × 50,000 × 9 ÷ 26 = 67,50,000 ÷ 26 = ₹2,59,615.38
Example B: fixed-term employee.
Last drawn wages ₹30,000; service 1 year 8 months, rounded to 2 years under Rule 33.
15 × 30,000 × 2 ÷ 26 = 9,00,000 ÷ 26 = ₹34,615.38
Example C: what the 50% rule does to the liability.
Ten years of service.
At basic ₹30,000: 15 × 30,000 × 10 ÷ 26 = ₹1,73,076.92
At basic ₹50,000: 15 × 50,000 × 10 ÷ 26 = ₹2,88,461.54
The same employee's liability rises by ₹1,15,384.62, so plan the provision and, if you fund through a trust or insurer, the contribution.
4. Payment and nomination
- Gratuity is payable within 30 days of becoming due, with interest at the government-notified rate if late. Exit wages are due within 2 working days.
- Form F: the employee's nomination, within the prescribed time after one year of service.
- Form J: nominee's application on the employee's death.
- Form K: legal heir's application if there is no nominee.
5. Forfeiture
Gratuity can be forfeited in whole or part for wilful violence or property damage, or after conviction for an offence involving moral turpitude (Section 4(6) as carried in the earlier law; check the Code's equivalent provision [verify]). Never forfeit without a documented process.
6. Tax
Gratuity received by a private-sector employee is exempt up to a lifetime aggregate of ₹20 lakh across employers, and ₹25 lakh is quoted for government employees. Amounts above are taxed at slab rates. The statutory limit on the gratuity amount itself is not stated in the source I used [verify].
7. What HR should do now
- List all fixed-term and contract employees and compute their pro-rata liability.
- Re-run the actuarial valuation on the new wage base.
- Update the offer letter and fixed-term contract template with the gratuity clause.
- Collect Form F nominations from every employee.
- Create a gratuity payment calendar so that no case crosses 30 days.
- Decide whether to fund through an insurer or a trust.
Frequently Asked Questions (FAQs)
Yes, eligible fixed-term employees qualify after one year of service.
Gratuity must generally be paid within 30 days of becoming due.
The rules cover eligibility, wage calculation and gratuity benefits under the Code on Social Security, 2020.
The exemption limit for covered private-sector employees is generally ₹20 lakh, subject to applicable conditions.
Generally, five years for permanent employees and one year for eligible fixed-term employees. Exceptions apply in cases of death or disablement.
Conclusion
Gratuity is a deferred cost that rewards organised employers. Compute it every year, not only on exit.